Gary Lamphier: Oil price outlook dims as doubts grow over OPEC deal

In this 2015 file photo, a man rides a camel through the desert oil field and winter camping area of Sakhir, Bahrain. OPEC nations have agreed in theory that they need to reduce their production to help boost global oil prices during a meeting in Algeria, but a major disagreement between regional rivals Saudi Arabia and Iran still may derail any cut.Hasan Jamali / AP

Oil prices dropped sharply Monday, driving the benchmark grade of U.S. light crude to its lowest level in more than a month, as the Organization of Petroleum Exporting Countries (OPEC) struggles to reach agreement on a plan to curb output.

The December contract for West Texas Intermediate (WTI) crude closed at $46.86 US a barrel in New York, down $1.84 on the day and off by over $5 since WTI briefly topped the $52 mark in mid-October. Brent crude, the key international grade, also got whacked. It closed at $48.30 a barrel, down $1.41 on the session.

The Toronto Stock Exchange’s key energy index followed suit, tumbling 1.9 per cent Monday. Over the past five sessions, it has slid about 3.8 per cent.

Shares of leading Alberta oil producers such as Crescent Point, MEG Energy and Baytex all fell by more than three per cent, while Suncor slipped about 2.5 per cent and high-flying juniors like Spartan Energy and Raging River shed more than two per cent apiece.

Monday’s pullback followed a weekend of marathon talks at OPEC headquarters in Vienna. The negotiations were aimed at finalizing the details of a proposed plan by the cartel’s 14 members to reduce production to 32.5 million barrels per day (bpd), down from about 33.4 million bpd in September.

The proposal, unveiled in late September, also involves key non-OPEC oil producers such as Russia, the world’s largest oil producer. It is scheduled to be tabled at a formal meeting of OPEC members Nov. 30, but there is little sign of progress to date.

OPEC members Iraq and Iran continue to insist that they be exempted from any accord to shrink output, The Wall Street Journal reports. Iran, which was subject to oil export sanctions until January of this year, wants to expand its output by a further 400,000 bpd, the Journal reports, quoting an unnamed Iranian official.

Iraq, which is immersed in a brutal war against the Islamic State, is also pumping as much oil as it can to generate the revenues needed for its war effort. Other producers — notably Libya and Nigeria, which have already suffered major production disruptions due to insurgencies or terrorism — are also keen to boost output.

“I think it’s becoming clear that the desperate OPEC four (Iran, Iraq, Libya and Nigeria) are not going to play ball,” says veteran Maison Placements energy analyst Josef Schachter, who has remained overwhelmingly bearish on oil prices since mid-2014, and sees further downside ahead unless a deal to cut supplies is reached.

“These guys are desperate for revenues. The only money Libya can get to pay its bills is oil. What else do they have, camels? They have no choice. The only one that’s really up for debate is Iraq, but that’s B.S. They’re fighting a sectarian war, and with the amount of money being spent on the battle for Mosul, they’ll need a lot of cash coming in the door,” he argues.

“If the Americans won’t write the cheques, the Iranians won’t write the cheques and the Saudis won’t write the cheques, they’ve got to pump as much oil as they can. The debate today over how much Iraq is really selling doesn’t matter. If they could produce five or six million barrels a day, they’re going to do it.”

In view of the continued standoff among OPEC members, it’s no surprise that major players outside the cartel — including Russia, Mexico, Brazil and Kazakhstan — are also refusing to slow production until an accord is reached, the Journal notes.

The latest news from the U.S. Energy Information Administration (EIA) is also adding to the increasingly gloomy mood. The EIA reported Monday that U.S. output reached 8.7 million bpd in August, up from a low of 8.5 million bpd earlier in the summer, as the U.S. drilling rig count rebounded.

Add it all up, and it paints a depressing picture for oil prices heading into the final two months of the year. In fact, Schachter says prices could tumble all the way back to the low $30s by February or March — not far above the lows of last February — if an OPEC deal isn’t reached, and producers continue to boost output.

“People are listening to the OPEC talk, and not following the walk. What they’re doing and what they are saying are two different things. This (the proposed scheme to cut production) was just a game to push the price of oil up before winter,” he says.

“Libya is at 600,000 bpd, but they are going up. Nigeria’s numbers will be up. Iraq’s numbers will be up. So we’re going to be talking about two million bpd of excess supply,” he predicts.

“And when you get to end of winter, during the February-March shoulder season (when refinery demand typically drops), you’re going to be looking at four million bpd of excess capacity.”

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